What is a Consolidated Balance Sheet?

A consolidated balance sheet presents the financial position of an affiliated group of companies. The result is a balance sheet that shows the assets, liabilities, and equity of the group as though they were a single firm. This document is usually presented as part of a complete set of consolidated financial statements. When a consolidated balance sheet is prepared, inter-company transactions are removed to keep from inflating any accounts through double counting.

When conducted manually, the consolidation process needed to create a consolidated balance sheet is both lengthy and prone to error. Consequently, several commercially-available software packages have features that allow for a more automated consolidation process; this contributes to the completion of a faster close and the more rapid issuance of financial statements.

Example of a Consolidated Balance Sheet

The management of High Noon Armaments wants to take their company public through a reverse acquisition transaction with a public shell company, Peaceful Pottery. The transaction is completed on January 1, 20X4. The balance sheets of the two entities on the acquisition date are as follows:

On January 1, Peaceful issues 0.5 shares in exchange for each share of High Noon. All of High Noon’s shareholders exchange their holdings in High Noon for the new Peaceful shares. Thus, Peaceful issues 500 shares in exchange for all of the outstanding shares in High Noon.

The quoted market price of Peaceful shares on January 1 is $10, while the fair value of each common share of High Noon shares is $20. The fair values of Peaceful’s few assets and liabilities on January 1 are the same as their carrying amounts.

As a result of the stock issuance to High Noon investors, those investors now own 5/6ths of Peaceful shares, or 83.3% of the total number of shares. To arrive at the same ratio, High Noon would have had to issue 200 shares to the shareholders of Peaceful. Thus, the fair value of the consideration transferred is $4,000 (calculated as 200 shares × $20 fair value per share).

Goodwill for the acquisition is the excess of the consideration transferred over the amount of Peaceful’s assets and liabilities, which is $3,900 (calculated as $4,000 consideration - $100 of Peaceful net assets).

Based on the preceding information, the consolidated balance sheet of the two companies immediately following the acquisition transaction is: